SEBI Widens Commodity Derivatives Scope for FPIs — Liquidity Boost Expected
The Securities and Exchange Board of India (SEBI) has taken a major, long-awaited decision for foreign portfolio investors, or FPIs. The regulator has now allowed FPIs to participate in a wider set of exchange-traded commodity derivatives (ETCDs). This means foreign investors will no longer be restricted to cash-settled contracts alone — they will now also be able to take part in non-agricultural index derivatives and non-cash-settled non-agricultural commodity derivatives. SEBI has approved FPI participation in non-agricultural index derivative contracts, regardless of whether the underlying is cash-settled or not, as well as in non-cash-settled non-agricultural commodity derivative contracts. However, the regulator has made it clear that in the case of non-cash-settled non-agricultural commodity derivative contracts, FPIs will have to exit their positions before the delivery obligation begins.
This decision did not come out of nowhere. Its foundation was laid back in August 2026, when SEBI issued a consultation paper on the subject. In its consultation paper issued on August 11, 2026, SEBI said the proposals were aimed at broadening the participant base, enhancing liquidity and market depth, improving price discovery, and strengthening convergence between derivatives and physical markets. Until then, FPI participation had been fairly limited. FPIs could only participate in non-agricultural derivative contracts that were cash-settled, where the underlying contracts were also cash-settled.
SEBI also highlighted an important technical aspect regarding index derivatives. The regulator noted that index derivatives are always cash-settled, irrespective of whether their underlying assets are cash-settled, so allowing FPI participation in such contracts would not create any delivery-related issues. The Commodity Derivatives Advisory Committee (CDAC) had also supported this proposal.
The second, more complex part relates to physically settled — that is, non-cash-settled — contracts. These include contracts linked to crude oil, natural gas, gold, silver and base metals, many of which are closely tied to international benchmarks. Since it was essential to prevent foreign investors from actually taking delivery of commodities in India, SEBI proposed a two-tier safeguard mechanism. Under this mechanism, FPIs will have to square off or roll over their positions before the tender period begins. The tender period starts three days before expiry, known as T-3. If an FPI fails to do so, its open position will automatically be transferred to the proprietary account of a designated Trading Member or Trading-cum-Clearing Member.
To streamline this entire process, a few additional conditions have also been put in place. Under the proposal, an onboarding agreement will be required between the FPI and the relevant members, and exchanges will standardise the format and key terms of these agreements. SEBI has also proposed a "Proprietary Risk Absorption Charge," which may become payable by an FPI if its position is transferred because it failed to voluntarily square off or roll over the position in time.
This change is part of a gradual but continuous journey for India's commodity market. India has allowed FPIs into commodity derivatives step by step — starting with limited cash-settled contracts, followed by the Direct Market Access (DMA) facility, and now this expansion into non-agricultural index and non-cash-settled contracts. There has been a clear reason behind this cautious approach. Indian regulators have remained wary that sudden outflows by FPIs could destabilise the commodity market. This is why agricultural commodities have been kept out of this expanded scope, to avoid unnecessary volatility in them, while non-agricultural segments such as bullion, energy and base metals have been prioritised.
SEBI's move isn't limited to FPIs alone. At the same meeting, the regulator also approved several other significant reforms. These include changes to Portfolio Management Services (PMS) regulations and settlement procedures, relaxation of the requirement for research analysts and research entities to maintain call recordings of communications with institutional clients, and a common advertisement code allowing certain regulated entities to use celebrities for brand-level promotion.
According to market watchers, this decision could benefit the domestic commodity derivatives market on multiple fronts. Greater institutional participation will deepen liquidity and market depth, widen hedging options, and make the price discovery process more effective. It is also seen as a step toward bringing India's derivatives market closer to global commodity markets.
What Will Matter Next as This Decision Rolls Out?
The key thing to watch now is how SEBI practically implements this framework — particularly around onboarding agreements, tender-period conditions, and the rollout of the Proprietary Risk Absorption Charge. It will also be worth watching how much genuine interest FPIs show in this newly opened space, given that they already have access to more liquid commodity markets globally.
Source: Moneycontrol News, Business Standard, BW Businessworld
